Which Is Right For You — Credit Repair vs Debt Consolidation
(DailyDig) – While both debt consolidation and credit repair can be incredibly useful to anyone trying to rebuild their credit, they are most definitely not the same thing. Understanding the nuance will make it easier to choose which is right for your personal situation.
Credit Repair vs Debt Consolidation
- Debt consolidation is a form of debt refinancing that entails combining all of your various liabilities and debts into one personal loan. This loan is then paid down over time. Debt consolidation often includes credit card debts, student loans, auto loans, or medical bills.
- Credit repair is the act of attempting to restore or correct a poor credit score. This can include disputing any incorrect information on your credit report with credit agencies. The Fair Credit Reporting Act (FCRA), which was enacted in 1970, requires that information in your credit report be completely accurate and fair, or else it will be removed. Credit repair may also be necessary if you’ve been a victim of identity theft.
With all of the technical terms, the definitions can sound kind of intimidating, but don’t worry because it’s actually pretty simple. Let’s break it down:
Pros & Cons of Debt Consolidation
- Fewer monthly payments – Instead of having a bunch of separate payments to worry about every month, you would only pay one payment to the same company each month.
- Lower monthly payments – Your overall monthly payment will probably be smaller, due to the new (and most likely extended) loan terms.
- Interest – With a lower-interest debt consolidation loan, you could save quite a bit of money on interest over time. This can be especially helpful for those with various high-interest loans or credit card debts. You could then use the money you saved to make an extra payment, and pay it down even faster.
- Credit score – By paying off several revolving debts like credit cards, you could reduce your credit utilization rate, or “credit umbrella”. This can actually help to improve your credit score. The recommended credit utilization rate is 30% or less.
- You may need to have a fairly decent credit score to qualify for a debt consolidation loan.
- Applying for a debt consolidation loan may cause a temporary drop in your credit score because lenders have to perform a hard inquiry in order to secure your loan.
- Debt consolidation can involve additional fees, such as origination fees, closing costs, balance transfer fees, and, of course, annual fees. Although these fees can usually be included in the final amount of the loan, they do add to the overall cost of your loan.
- If your credit hasn’t improved since you applied for your credit cards or your original loans, there is a chance that your interest rate will stay the same, or possibly even be higher.
Pros & Cons of Credit Repair
- Credit repair can be useful for those struggling with inaccurate information on their credit report.
- The process can help improve lower credit scores over an extended period of time.
- Credit repair services can do all the hard work for you, so you don’t have to spend hours at a time on the phone, (unless you like having arguments with pre-recorded messages, of course).
- Credit repair services tend to have more substantial negotiating power and a lot more knowledge about how to deal with credit and debt collection agencies.
- Credit repair can be a long and complicated process, especially if you are trying to do it all yourself.
- There can be fees associated with hiring a credit repair service.
- The credit repair process doesn’t come with a guarantee.
In the end, it’s ultimately up to you to learn as much as possible and then make an informed decision on how to approach your unique situation. Once you know how you want to handle it, don’t hesitate to reach out to a trustworthy credit repair service or debt consolidation service to explore your options.
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